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Margins, costs threaten luxury-store values

Blue-sky multiples slide for some brands

Declines in luxury-vehicle margins and sales in 2016 could mean lower values -- and less transaction activity -- for luxury-brand dealerships in the buy-sell market, two buy-sell advisers said.

In addition to margin and volume pressure, luxury-brand dealerships are experiencing a potential drag on values because of the pressure from some luxury-brand automakers to upgrade stores to new image requirements.

"Fewer buyers are comfortable paying the high prices demanded by sellers of top luxury, particularly as luxury sales and margins come under pressure and luxury manufacturers demand expensive facility upgrades," Erin Kerrigan, a buy-sell adviser in Irvine, Calif., said last week in her second-quarter Blue Sky Report.

Alan Haig, president of Haig Partners, a buy-sell advisory firm in Fort Lauderdale, Fla., also questioned the outlook for luxury-brand stores in the buy-sell market in his second-quarter Haig Report.

While Haig expects stable blue-sky multiples for most midline import and domestic-brand franchises, "the outlook for premium luxury brands is a little cloudier," Haig said. As profits at those stores started falling in late 2015, "some buyers began to question why these franchises should bring valuations that were so much higher than nonluxury franchises."

Blue sky is the intangible value of a store beyond its physical assets and can vary enormously depending on an individual store's circumstances.

Dealership image requirements are part of the equation. Kerrigan, in her most recent report, slightly lowered her estimate of blue-sky multiples for BMW and Jaguar Land Rover in part because of increased dealership costs driven by expensive new image program requirements.

In March, Haig lowered his multiple estimates for BMW and Audi in part because of the expensive upgrades being required.

"Dealers tell us they are dismayed by the cost of the facility requirements demanded from some of these OEMs," Haig said.

In his most recent report, Haig lowered multiple estimates slightly for Mercedes-Benz stores.

The cost of any necessary store upgrades is always a big factor when evaluating a dealership for sale, said John Davis, a partner in the dealership practice at accounting firm Dixon Hughes Goodman. As sales plateau, as is now happening, "you do have to look harder at expenses."

Though there may be more concern about dealership expenses and the high cost of luxury-brand stores, it's unlikely to lead to significant price reductions for dealerships, the buy-sell advisers said.

Owners of top luxury-brand stores are unlikely to accept significantly lower multiples, Kerrigan said. "Thus, fewer top luxury franchises are likely to trade in the near term."

Because there are still relatively few luxury-brand stores, buyers tend to "stretch on price with the belief that they will be attractive long-term investments," Haig said. "Despite recent challenges in the premium luxury segment, we have seen only minimal movement in the prices of these stores."

For the overall buy-sell market, the number of transactions declined in the first half of 2016, Kerrigan and Haig reported. Values and demand for domestic-brand stores continue to be strong, although Kerrigan lowered her multiple estimate for Fiat Chrysler Automobiles brands after FCA acknowledged that it had misreported sales.

Kerrigan and Haig report more transactions involving multistore groups. That trend is likely to continue. Multistore transactions increased 52 percent during the first half of 2016, Kerrigan said, while the total of completed transactions dropped 17 percent. Multistore transactions now represent 30 percent of the buy-sell market, double 2015's level, she said.

Kerrigan forecast "significant growth" in the number of transactions overall during the second half -- which traditionally is busier than the first half for buy-sell deals -- particularly for multistore transactions. The deals she is working on now all involve more than one franchise.

"We are representing several large groups," she said. "The big deals continue to get done."